Dismal mining figures despite price rally

South Africa’s mining sector made a positive contribution to the overall GDP in the third quarter of 2007, but this is not expected to be the case in the fourth quarter, Efficient Group economist Fanie Joubert said on Thursday.

“The main stumbling block to the mining sector is the strike action as well as deaths on the mines, which result in time being lost in which the mines cannot produce,” said Joubert in an investor’s note following Statistics South Africa’s release of the country’s latest mining production and mineral sales figures.

The mining sector currently employs more than 400 000 people, making it an important contributor to the workforce, but in the second half of last year mining companies were hurt by strikes and shutdowns — many of them related to mineworkers halting work due to reported unsafe work conditions.

“With gold and platinum on record levels, the mining sector should make sure that work relations get addressed so that they can produce at full capacity and fully utilise the spike in precious metal prices,” said Joubert.

Output

Analysing the sector’s output in November, Joubert said mining production had a dismal month with production contracting by 7,8% year-on-year (seasonally adjusted), following the marginal (revised) rise of 0,3% in October.

This contraction for mining production during November is the weakest figure since January 2006, said Joubert, pointing out that the bulk of the downturn could be put at the feet of the platinum sector.

Platinum group metals (PGMs) production, which contributes 27,7% to the production basket, contracted sharply by -11,9% year-on-year (October: 0,5%), mostly due to reported shaft closures during October and November.

Gold, which carries a weight of 25,7%, continued to decline, worsening to -12,6% year-on-year in November following contractions during October and September of -0,9% and -6,8% respectively.

Coal, the third-largest production item, contracted by -7,6%, compared with November 2006.

Joubert said the value of mining sales also continued to struggle when compared with the stellar rises recorded during the same period in 2006, and showed a contraction of -4,7% year-on-year (October: -0,1%).

The rise in the value of mining sales continued its downwards trend as it dropped sharply from an average monthly rise of above 30% year-on-year (seasonal) during the second quarter of 2007 to contractions of -0,1% in September and -4,7% in October.

Prices

Precious-metal prices — particularly gold and platinum — spiked between May and August 2006, initiated by uneasiness in the world’s equity markets at that time. This created a sharp jump in the value of mining sales, which are suppressing annual comparative performances.

“The spectacular rise in precious metal prices, notably gold and platinum, from the fourth quarter 2007 should provide support to mining sales during the next few months,” said Joubert, adding that it should be kept in mind that the rand strengthening towards its strongest levels for the year to date in October 2007 would counter some of the impact of the rising commodity prices.

It was this rise in prices that allowed the PGM sector to remain comfortably the highest-income-earning mining sector in October.

The price of platinum rose from levels around $1 250 per ounce in September 2007 to $1 450 an ounce at the end of October, which should have provided some support to the sector.

The PGM sector recorded an average rise of 75% year-on-year during the fourth quarter of 2006, which created a high base that consequently dampens current annual comparisons.

Coal also performed well, with the value of coal sales recording an average figure of R3,5-billion during the year to September, placing October’s sales figure above average.

Joubert said the value of coal had consistently outperformed gold during the period June to October 2007. That said, the recent strong rises in the price of gold should provide support to the sector during the coming months, he concluded. — I-Net Bridge

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